If you were one of the countless first-time investors who climbed aboard the cryptocurrency train in 2021, then you want to make sure that you completely understand cryptocurrencies could impact the way that you file taxes. Unlike traditional income, such as your bi-weekly paycheck that you presumably receive in USD, cryptocurrencies are treated as capital gains by the IRS in the same way that income from stocks and dividends are treated. But how does that apply to your income tax filings this year?
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Cryptocurrency Is Subject to Capital Gains Tax
As we touched on above, to the IRS, income from cryptocurrencies is treated in the same way that they treat income from stocks and dividends— as capital gains. In short, capital gains are based on the difference between the cost at the time of purchase and the sale and the holding period. Additionally, capital gains taxes from cryptocurrencies are determined based on the individual’s taxable income.
Buying Cryptocurrency Isn’t Taxable
That being said, there is nothing to tax in years where an individual has only purchased and held cryptocurrency without selling or trading. That’s good news for anyone that is holding cryptocurrencies for the long haul. But of course, when you do finally cash out, you will be subject to capital gains tax although less than you would owe if you bought and sold within the same year.
When Receiving Cryptocurrency As Payment
The only time that cryptocurrencies are not taxed as capital gains is when an individual receives crypto as payment. An example of this would be a business paying their employees, vendors, or contractors in cryptocurrencies rather than in USD. In this case, the cryptocurrency would be treated as normal income and taxed accordingly based on the market value on the day of the payment. With cryptocurrency becoming increasingly more common, it is likely that these kinds of transactions will be more common as well.